AUSTRALIAN ENHANCED INCOME FUND ARSN ANNUAL REPORT FOR YEAR ENDED 30 JUNE 2015

Transcription

1 ANNUAL REPORT FOR YEAR ENDED 30 JUNE 2015 RESPONSIBLE ENTITY ELSTREE INVESTMENT MANAGEMENT LTD LEVEL 10, 30 COLLINS ST MELBOURNE, VIC, 3000

2 The Australian Enhanced Income Fund (the Fund ) is a Listed Investment Trust (LIT). The fund invests in a pool of Australian listed hybrid securities. The Responsible Entity of the fund is Elstree Investment Management Ltd (ABN ). Directors Auditors Campbell Dawson (Chairman) Norman Derham (Company Secretary) John Abbott BDO East Coast Partnership Registered Office Level 10, 30 Collins Street, Melbourne VIC 3000 Contact Details Share Register Stock Exchange ASX Code Mail Address: Level 10, 30 Collins Street Melbourne VIC 3000 Telephone: (03) Facsimile: (03) info@eiml.com.au Website: Advanced Share Registry Ltd 110 Stirling Highway Nedlands WA 6009, Telephone: Facsimile: Website: Australian Securities Exchange (ASX) AYF (Fully Paid Units) 2

3 FUND PROFILE Investment pool The Australian Enhanced Income Fund (the Fund ) invests in a pool of ASX listed debt equity hybrid securities using the portfolio construction methods successfully employed over a number of years by Elstree Investment Management Limited. Investment return The total investment return of the Fund for the period July 1, 2014 to 30, 2015 was 0.30%. Number of securities Minimum distribution Payment frequency Reinvestment Franking Credits Off market application Off market redemption Timeframe The portfolio typically contains between 30 and 40 ASX listed debt equity hybrid securities. The Fund s Responsible Entity ( RE ) has determined that the minimum cash distribution be set at a rate of 0.40 per annum (net of fees). Distributions are paid quarterly. Reinvestment is available at each distribution point. Franking credits may be attached to distributions. The amount of franking is dependent upon the manager s strategies. Franking credits typically add around 0.06 per unit per annum to the cash distributions of the fund. Investors can apply for units in the Fund off market twice a month through a financial adviser. New units will be issued at the higher of the net asset value (NAV) or average market price (AMP) plus an allowance for transaction costs. Refer to the Fund s PDS for details. Unit holders can redeem units in the Fund at the Fund s Net Asset Value (NAV) of a unit less an allowance for transaction costs. Off market redemptions are conducted on a monthly basis. The RE reserves the right to reject a redemption request at its absolute discretion. Refer to the Fund s PDS for details. The suggested timeframe for an investment in the fund is 3 years. Product benefits Increased security diversification Reduced total portfolio risk due to low return correlation to other asset classes and like sectors Superior risk adjusted return vis-à-vis individual securities Cash flow certainty Liquidity ASX and monthly off market redemption facility. 3

4 CONTENTS Market and Performance Review 5 Corporate Governance Statement 8 Directors Report 12 Auditor s Independence Declaration Statement of Profit or Loss and Other Comprehensive Income.. 18 Statement of Financial Position. 19 Statement of Cash Flows 21 Notes to the Financial Statements Directors Declaration. 41 Independent Auditor s Report to the members 42 4

5 Market and Performance Review The Australian Enhanced Income Fund produced a flat and disappointing result over the 2015 Financial Year. The Fund s total investment return was 0.3%. In cash terms the return comprised; A decrease in net asset value (NAV) of 0.42 Cash distributions of 0.40 and Franking credits equivalent to 0.04 Over the same period the All Ordinaries Accumulation Index returned 5.6% while the UBS (Australia) Bank Bill index returned 2.6%. The 2 major drivers of the Fund s return over the 2015 year were; Oversupply: New supply of 8.2 billion was the second largest year of bank hybrid issuance ever. This was exacerbated by the CBA PERLS VII issue which was far larger than investors anticipated and resulted in an overhang in the market for months. Equity and global market volatility. Equity market volatility increased for the first time in 3 years and after a period of relative calm, concerns about Greece s solvency and what it meant for the Euro conspired to produce poor returns in the quarter. Outlook Last year we said that while margins were above structural fair value we saw an end to the capital gain of the previous 3 years with some potential for weakness. We were half right, but the extent of market weakness surprised us a little. The capital losses occurred as spread margins on hybrids increased over the year. At the end of (and again in August) spread margins are at levels that have only been experienced once since the GFC ended in early We remain of the view that the structural fair value of spread margins is much lower but we re less certain of the path to narrower margins. As we know, hybrid returns tend to be flat when equity markets are weaker and we expect continued equity market volatility. Since the GFC, hybrid markets have been largely unaffected by equity market volatility, and this continues to be the case with hybrids in August weaker by around 0.8% compared to the -8.0% return in the equity markets. 5

6 We are more confident on the supply issue. For the 2016 FY we expect that issuance will be less than half that of 2015 FY and given the redemption of 2 large issues, the expected net issuance of c2b will be the lowest net issuance since However, given that most investors access hybrids through the primary market (i.e IPO s), the path to narrower spread margins is a little less clear. While changes in capital values are important in the timing of returns, what is more comforting is the level of yield. With securities the Fund owns yielding around 4.0% over a bank bill rate of 2.1%, returns look to remain well above cash and term deposit levels. We believe that the additional yield more than accounts for the volatility that may be experienced. Distributions Despite 2 interest rate cuts by the RBA during the year we maintained the Fund s cash distribution rate at 0.40c per annum. This remains above the actual income level of the Fund, and without capital gains that come from a narrowing of spread margins the NAV of the Fund will slowly decline. We expect margins will narrow this fiscal year and unless the RBA cuts the official cash rate again we anticipate maintaining the 0.40c cash distribution rate for the 2016 fiscal year. Including an expected level of franking credits of c0.04, this translates, assuming an NAV of 6.20, to a grossed up cash yield of around 7.10%. i) We expect that term deposit rates will continue to fall, even if official cash rates remain where they are. Banks now have excess deposit funds and the deposit war is abating. ii) The hybrid supply pipeline is limited. We think there may be 1 new bank issue over the next 9 months. iii) Much of the demand for hybrids has been captured in the primary market. With the end of that option investors will need to use the secondary market to access securities. With stable prices, investors should focus on the role of hybrids in their income portfolio and we think an allocation to hybrids makes good sense given the yield enhancement and relatively low volatility. 6

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8 CORPORATE GOVERNANCE STATEMENT CORPORATE GOVERNANCE STATEMENT Overview The Australian Enhanced Income Fund ( the Fund ) is a listed, managed investment scheme. The units of which are listed on the Australian Securities Exchange (ASX). The ASX Corporate Governance Council provides the guidelines for good corporate governance. The directors of the Responsible Entity (RE), Elstree Investment Management Limited, understand and recognise the importance of good corporate governance. The RE has appointed Elstree Investment Management Limited as the manager of the Fund. This Corporate Governance Statement is designed to ensure the effective management and operation of the Fund. It will be reviewed periodically. A description of the RE s adopted practices in respect of the Corporate Governance Principles and Recommendations as determined by the ASX Corporate Governance Council are set out below. These practices were in operation throughout the period denoted above and are current as at the date of this report. Recommendation 1 - Lay solid foundations for management and oversight The RE, as outlined in the Fund s Constitution, is responsible for the overall operation, strategic direction and maintaining the integrity of the Fund. This involves undertaking the following functions: 1. Providing a platform for the implementation of the Fund s strategic direction. 2. Reviewing the risk management function to ensure that where significant risks facing the management of the Fund are identified, there is appropriate control, monitoring and reporting mechanisms are in place so that that risk is appropriately dealt with. 3. Ensuring the RE board discharges its responsibilities appropriately by having regard to the Corporations Law, the Fund s Constitution, the ASX Listing Rules and best governance practise. 4. Reviewing and overseeing internal and regulatory compliance. 5. Ensuring compliance with the Fund s Constitution and with the continuous disclosure requirements of the ASX Listing rules and the Corporations Act Communicating with and protecting the rights and interest of all unit holders. 8

9 CORPORATE GOVERNANCE STATEMENT Recommendation 2 - Structure the board to add value Board independence: There are no independent directors of the RE board. Committees: As a legal requirement of the Fund s Constitution, the RE has approved and appointed a Risk Management and Compliance Committee with a majority of independent members. Details of the Risk Management and Compliance Committee can be found below under recommendation 4. There are no other committees as the board considers them not relevant to the functioning of the Fund. Performance Evaluation: The board of the RE reviews the performance of the board of directors of the RE. This is through discussion and communication with the Chairman of the board as determined by widely accepted board performance standards. During the period, the board of the RE conducted an evaluation of its performance by discussion with the Chairman. Recommendation 3 - Promote ethical and responsible decision making While the RE does not have a formal code of conduct the RE is cognisant of maintaining the integrity of the Fund. In maintaining the integrity of the Fund the RE has established a trading policy for both units in the Fund and for other securities for board members of the RE. Unit and Securities Trading Policy: The board of the RE established a trading policy regarding trading on the ASX of the Fund s units and securities in which the Fund is invested in or considering being invested in by board members of the RE. This policy details: - A transaction window for transacting in units directly in the Fund and the requirement to obtain documented pre-transaction approval from the Chairman of the board of the RE. In the Chairman s absence another director must give approval; - A moratorium in dealing directly in the Fund s units during this transaction window while in possession of price sensitive information; and - Dealings in securities in which the Fund is transacting or may be considering transacting in. A director of the RE must seek pre-transaction documented approval from the Chairman of the board of the RE or in the Chairman s absence another director before transacting in any security that the Fund is transacting in or is considering transacting in. A copy of the RE s Trading Policy will be made available upon request. Gender diversity: The Board recognises the ASX Recommendations in respect of gender diversity of board members. However, due to the small size and lack of independence of the board, the board considers it is not practical or relevant to its operations at the present time. 9

10 CORPORATE GOVERNANCE STATEMENT Recommendation 4 - Safeguard integrity in financial reporting As a registered managed investment scheme, the RE has a compliance plan that has been lodged with Australian Securities and Investments Commission (ASIC). The compliance plan is reviewed to ensure that the way in which the RE operates, protects the rights and interests of unit holders and that compliance risks are identified and properly managed. As a legal requirement of the Fund s Constitution the RE has formed a Risk Management and Compliance Committee to ensure the Fund complies with the Corporations Law and the Fund s Constitution. Risk Management and Compliance Committee reports are conducted quarterly and presented and reviewed by the board of the RE. The Risk Management and Compliance Committee is made up of three members, the majority of whom are independent. The Risk Management and Compliance Committee members are; Campbell Dawson (Internal member), Richard Oakes (Independent Member) and Els Termaat (Independent Member). Audit committee: The RE, having considered the overall scope and responsibility of the Risk Management and Compliance Committee, does not consider it necessary to establish an audit committee. The Compliance Committee addresses the integrity of corporate reporting as part of it s function. Recommendation 5 - Make timely and balanced disclosure The RE operates the Fund under the continuous disclosure obligations of the Corporations Act 2001 and ASX Listing Rules. The RE ensures that relevant information is released to the market and to unit holders in a timely and appropriate manner so that the market and unit holders have an equal opportunity to assess relevant and material information concerning the Fund. The Secretary of the RE is responsible for ensuring that information is released to the market and unit holders in a timely manner. The RE does not have a formal written procedure regarding reporting but is governed by the Corporations Law, the Fund s Constitution and the continuous reporting requirements of the ASX Listing Rules. The Secretary reports to the board of the RE on this process. 10

11 CORPORATE GOVERNANCE STATEMENT Recommendation 6 - Respect the rights of unit holders The RE promotes effective communication with unit holders. Unit holders are informed of all major developments affecting the Fund s performance and activities. Information is communicated to unit holders and to the market at large though announcements to the ASX and through dispatch of financial reports by post or by electronic means. The RE s website is also used to facilitate communication with unit holders. Communications include: - Monthly fund performance commentary and monthly net asset value (NAV) reporting, - Half year or interim report, - Annual report, - Periodical announcements to the ASX made in compliance with the Fund s continuous disclosure requirements; and - Periodical correspondence sent by post or electronic means to unit holders on matters of significance to the Fund. Unit holders are encouraged to access such announcements and releases from the ASX website and the RE s website. The RE encourages full participation of unit holders at the Fund s Annual General Meeting to ensure a high level of accountability and communication. Recommendation 7 - Recognise and manage risk The board has accepted the role of identification, assessment, monitoring and management of significant areas of risk applicable to the Fund and the Fund s operations. As a requirement of a managed investment scheme, the board of the RE approved and appointed a Risk Management and Compliance Committee with a majority of external members to ensure the Fund complies with the Corporations Act 2001 and the Fund s Constitution. Recommendation 8 - Remunerate fairly and responsibly There is no remuneration committee. In accordance with the Fund s Constitution, the RE as manager of the Fund is entitled to a management fee for the provision of management services to the Fund. Details of the management fees charged by the manager are disclosed in the notes to financial statements within the Annual Report. Directors of the RE do not receive director s fees as directors of the RE. Directors of the RE are remunerated as executives of the management company for Fund s management services provided in the management of the Fund s assets. The Fund s Constitution is available on the RE s website. 11

12 DIRECTORS OF THE RESPONSIBLE ENTITY REPORT DIRECTORS REPORT The directors of Elstree Investment Management Limited, the responsible entity for the Australian Enhanced Income Fund ( the Fund ) present their report together with the financial report of the Australian Enhanced Income Fund for the year ended The financial statements and notes are in accordance with the Corporations Act 2001 and comply with Accounting Standards and Regulations. PRINCIPAL ACTIVITIES The Fund invests in listed and unlisted debt hybrid securities and cash investments in accordance with the Fund Constitution and the Fund Product Disclosure Statement. There were no significant changes in the nature of the Fund s activities during the period. The Fund has not gained or lost control of any entities over the reporting period. The Fund has no associates and is not involved in joint venture entities. RESPONSIBLE ENTITY The responsible entity and ultimate controlling party of the Australian Enhanced Income Fund is Elstree Investment Management Limited. The Directors in office at any time during or since the end of the year and up to the date of this report are: Campbell E Dawson Norman St. G Derham John P Abbott Qualifications Experience Special responsibilities Directors meetings attended Bachelor of Commerce Graduate Diploma of Applied Finance Chartered Financial Analyst 33 years experience in funds management and banking Bachelor of Economics 35 years experience in financial markets Bachelor of Commerce 26 years experience in fixed interest funds management Nil Nil Nil

13 REVIEW OF OPERATIONS AUSTRALIAN ENHANCED INCOME FUND DIRECTORS OF THE RESPONSIBLE ENTITY REPORT During the period, the Fund managed the investments in accordance with the Product Disclosure Statement (the PDS ) and the Constitution. The Fund produced lower returns this year, with falls in security prices outweighing income. The 5 year run of continual increases in security prices ended this year as the world grappled with a potential Greek default and some prospect of the US raising interest rates. This resulted in hybrid margins reaching post GFC highs and setting the scene for good income returns in the medium future The performance of the Fund was as follows; Year ended Year ended Net operating profit/(loss) (175,434) 1,438,774 Distributions paid and payable 1,031, ,996 Distributions (cents per unit) FINANCIAL POSITION Net Asset Value per unit as disclosed to the ASX Year ended Year ended As at end of the year High during the year Low during the year Unit movements and issue Year ended Year ended Units on issue at start of year 2,249,528 2,440,853 Units issued 651,986 41,843 Units redeemed (2,995) (233,168) Units on issue at end of year 2,898,519 2,249,528 The value of net assets and liabilities and details of the unit movements are disclosed in the financial statements. 13

14 DIRECTORS OF THE RESPONSIBLE ENTITY REPORT SIGNIFICANT CHANGES IN STATE OF AFFAIRS In the opinion of the directors, there were no significant changes in the state of affairs of the Fund that occurred during the financial period under review. MATTERS SUBSEQUENT TO THE END OF THE FINANCIAL YEAR There have been no matters or circumstances that have arisen since that have significantly affected, or may significantly affect; the operations of the Fund in future financial years; the result of those operations in future financial years; or the state of affairs of the Fund in future financial years LIKELY DEVELOPMENTS AND EXPECTED RESULTS OF OPERATIONS The Fund will continue to be managed in accordance with the investment objectives and guidelines as set out in the governing documents of the Fund and in accordance with the provisions of the Fund Constitution. The results of the Fund and its operations will be affected by a number of factors including the performance of investment markets in which the Fund invests. Investment performance is not guaranteed and future returns may differ from past returns if investment conditions change over time, past returns should not be used to predict future returns. Further information on likely developments in the operations of the Fund and the expected results of those operations have not been included in this report because the responsible entity believes it would be likely to result in unreasonable prejudice to the Fund. INDEMNIFICATION AND INSURANCE OF OFFICERS No insurance premiums are paid for out of the assets of the Fund in regards to insurance cover provided to either the officers of Elstree Investment Management Limited or the auditors of the Fund. Provided the officers of Elstree Investment Management Limited act in accordance with the Fund constitutions and the law, the officers remain indemnified out of the assets of the Fund against losses incurred while acting on behalf of the Fund. REMUNERATION REPORT (audited)_ Key management personnel are Directors of Elstree Investment Management Limited, the responsible entity of the Fund. Key management personnel receive no remuneration from the Fund. 14

15 DIRECTORS OF THE RESPONSIBLE ENTITY REPORT REMUNERATION REPORT (CONTINUED) As at the Fund s key management personnel held the following interests in the Fund Units held Directors Position Balance at Acquisitions/ Options Exercised Options lapsed Disposals Balance at C.E. Dawson Chairman 35,001 3, ,898 N.S. Derham Director 15,318 3, ,487 J. Abbott Director 4,980 2, ,360 Units held Directors Position Balance at Acquisitions/ Options Exercised Options lapsed Disposals Balance at C.E. Dawson Chairman 32,699 2, ,001 N.S. Derham Director 14, ,318 J. Abbott Director 4, ,980 Directors and director related entities disposed of and acquired ordinary units and options in the Fund on the same terms and conditions available to other unitholders. The Directors have not, during or since the end financial year, been granted options over unissued shares or interests in units of the Fund as part of their remuneration. This concludes the remuneration report, which has been audited. ENVIRONMENTAL REGULATION The operations of the Fund are not subject to any particular or significant environmental regulations under a Commonwealth, State or Territory law. PROCEEDINGS ON BEHALF OF FUND No person has applied for leave of Court to bring proceedings on behalf of the Fund or intervene in any proceedings to which the Fund is party for the purpose of taking responsibility on behalf of the Fund for all or any part of those proceedings. The Fund was not a party to any such proceedings during the year. 15

16 DIRECTORS OF THE RESPONSIBLE ENTITY REPORT AUDIT SERVICES During the year, BDO East Coast Partnership (BDO), the Fund s auditor, did not perform any other services in addition to their statutory duties for the Fund. Details of the amounts paid to the auditor and their related parties are disclosed in note 4 to the Financial Statements. The company has not, during or since the end of the financial year, indemnified or agreed to indemnify the auditor of the company or any related entity against a liability incurred by the auditor. During the year, the Fund has not paid a premium in respect of a contract to insure the auditor of the Fund or any related entity. FEES PAID TO AND INTERESTS HELD IN THE FUND BY THE RESPONSIBLE ENTITY OR ITS ASSOCIATES In accordance with the PDS and Constitution, the Responsible Entity received a fee of 0.85% of the net value of assets for the management of the Fund for the period ended This amount is calculated monthly and paid quarterly and totalled 128,623 (year ended : 119,286). Interests held in the Fund by the Responsible Entity or its associates are disclosed in note 12 of the Notes to the Financial Statements. AUDITOR S INDEPENDENCE DECLARATION A copy of the Auditor s Independence Declaration as required under section 307C of the Corporations Act 2001 is set out on page 12. This report is signed in accordance with a resolution of the Board of Directors of the Responsible Entity. Campbell Dawson Director Sydney 20 August

17 Auditor s Independence Declaration 17

18 STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME Notes Revenue 3(a) 784, ,180 Management fees (128,624) (119,286) Fund expenses (85,293) (75,208) Net (loss)/gain on financial assets held at fair value through profit or loss 3(b) (745,546) 812,088 (Loss)/Profit attributable to unitholders before income tax 6 (175,343) 1,438,774 Income tax expense 1(a) - - (Loss)/Profit attributable to unitholders (175,343) 1,438,774 Finance costs attributable to unitholders Distributions paid or payable to unitholders Decrease/(increase) in net assets attributable to unitholders Other comprehensive income for the year, net of tax Total comprehensive income attributable to unitholders 7 (1,031,036) (933,996) 1,206,379 (504,778) Basic earnings per unit (cents) 19 (0.07) 65.6 Diluted earnings per unit (cents) 19 (0.07) 65.6 The statement of profit or loss and other comprehensive income should be read in conjunction with the accompanying notes 18

19 STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE Notes Assets Cash and cash equivalents 8 456, ,873 Trade and other receivables 5 140,570 51,095 Financial assets held at fair value through 9 17,529,642 14,753,692 profit or loss Total Assets 18,126,625 15,120,660 Liabilities Trade and other payables , ,900 Distributions payable 7 289, ,953 Total Liabilities (excluding net assets attributable to unitholders) 496, ,853 Net assets attributable to unitholders 6 17,630,267 14,736,807 Total Liabilities 18,126,625 15,120,660 The statement of financial position should be read in conjunction with the accompanying notes. 19

20 STATEMENT OF CHANGES IN EQUITY In accordance with AASB 132 Financial Instruments: Presentation, unitholders funds are classified as a liability and accordingly the Fund has no equity for financial statements purposes. As a result there was no equity at the start or end of the financial year and as such the Fund is not required to have a statement of changes in equity. 20

21 STATEMENT OF CASH FLOWS Notes CASHFLOWS FROM OPERATING ACTIVITIES Proceeds from the sale of securities 12,524,744 11,647,241 Purchases of securities (16,141,599) (10,327,449) Dividends and distributions received 401, ,294 Interest received 391, ,407 Other income 2,500 - Payments to suppliers (169,734) (191,211) Net cash (used in)/from operating 13 activities (2,991,342) 1,958,284 CASHFLOWS FROM FINANCING ACTIVITIES Proceeds from applications by unitholders 4,119, ,109 Units redeemed (19,689) (1,497,024) Distributions paid (967,956) (974,537) Net cash from/(used) in financing activities 3,131,882 (2,198,452) Net increase/(decrease) in cash and cash equivalents 140,540 (240,170) Cash and cash equivalents at beginning of period 315, ,043 Cash and cash equivalents at end of 8 period 456, ,873 The statement of cash flows should be read in conjunction with the accompanying notes. 21

22 NOTES TO THE FINANCIAL STATEMENTS 1. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES The financial report is a general purpose financial report that has been prepared in accordance with Australian Accounting Standards and Interpretations as issued by the Australian Accounting Standards Board ( AASB ) and the Corporations Act 2001, as appropriate for profit oriented entities. The Fund is a listed registered managed investment scheme, incorporated and domiciled in Australia. The financial report has been approved for release by Board of Directors of the Responsible Entity on 22 August The Board of Directors of the Responsible Entity have the power to amend and reissue the financial report. The following is a summary of the material accounting policies adopted in the preparation of the financial report. The accounting policies have been consistently applied, and except where there is a change in accounting policy, are consistent with those of the previous year. Basis of Preparation These financial statements comply with International Financial Reporting Standards (IFRS), as issued by the International Accounting Standards Board. The financial statements have been prepared on an accruals basis and are based on historical costs with the exception of held-for-trading financial assets and certain other financial assets and liabilities which have been measured at fair value. Amounts in this report have been rounded to the nearest dollar. The registered office and principal place of business are Level 10, 30 Collins St. Melbourne, VIC, 3000 Accounting Policies (a) Income Tax Under the Income Tax Assessment Act 1997, the Fund is not subject to income tax provided the net income including assessable capital gains tax is fully distributed to unitholders. The distributions are recognised in the statement of profit or loss and other comprehensive income as financing costs attributable to unitholders. Where net income is not fully distributable, the undistributed portion is subject to income tax at 48.5%. Financial assets held at fair value may include unrealised capital gains. Should such a gain be realised, that portion of the gain that is subject to capital gains tax will be distributed so that the Fund is not subject to capital gains tax. 22

23 NOTES TO THE FINANCIAL STATEMENTS 1. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Realised capital losses are not distributed to unitholders but are retained in the Fund to be offset against any realised gains. If realised capital gains exceed realised capital losses, the excess is distributed to unitholders. The benefits of imputation credits and foreign tax paid are passed to unitholders. (b) Distributions In accordance with the Fund Constitution, the Fund fully distributes its distributable (taxable) income to unitholders by cash or reinvestment. The distributions are recognised in the statement of profit or loss and other comprehensive income as financing costs attributable to unitholders. (c) Financial Assets i) Classification Financial assets consist of debt securities, including corporate bonds, convertible notes and hybrid securities in publicly listed and unlisted companies and investments in fixed interest securities. It is considered that the information needs of unitholders in a Fund of this type are better met by stating investments at fair value rather than historical cost and by presenting the statement of financial position on a liquidity basis. ii) Valuation All financial assets are classified as held-for-trading investments and are recognised at fair value, being market value, with changes in fair value recognised in the statement of profit or loss and other comprehensive income. Financial assets are priced at current bid prices. iii) Investment income Dividend and distribution income is recognised in the statement of profit or loss and other comprehensive income on the day on which the relevant investment is first quoted on an ex-dividend or exdistribution basis. Interest revenue is recognised as it accrues, taking into account the effective yield on the financial asset. (d) Impairment of Assets At each reporting date, the directors of the responsible entity review the carrying values of its tangible and intangible assets to determine whether there is any indication that those assets have been impaired. If such an indication exists, the recoverable amount of the asset, being the higher of the asset s fair value less costs to sell and value in use, is compared to the asset s carrying value. Any excess of the asset s carrying value over it recoverable amount is expensed to the statement of profit or loss and other comprehensive income. (e) Cash and Cash Equivalents Cash and cash equivalents include cash on hand, at call deposits with banks or financial institutions. 23

24 NOTES TO THE FINANCIAL STATEMENTS 1. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (f) Goods and Services Tax (GST) Revenues, expenses and assets are recognised net of the amount of GST, except where the amount of GST incurred is not recoverable from the Australian Tax Office. In these circumstances the GST is recognised as part of the cost of acquisition of the asset or as part of an item of the expense. Receivables and payables in the statement of financial position are shown inclusive of GST. Cash flows are presented in the statement of cash flows on a gross basis, except for the GST component of investing and financing activities, which are disclosed as operating cash flows. (g) Net Assets Attributable to Unitholders Units are redeemable at the unitholders' option and are therefore classified as financial liabilities. The units can be put back to the Fund at selected times for cash equal to the proportionate share of the Fund's net asset value. The fair value of redeemable units is measured at the redemption amount that is payable (based on the redemption unit price) at the reporting date if unitholders exercised their right to put the units back to the Fund. (h) Increase/ (Decrease) in Net Assets Attributable to Unitholders Non-distributable income is included in net assets attributable to unitholders and may consist of unrealised changes in the net fair value of financial instruments held at fair value through profit or loss, accrued income not yet assessable, expenses provided or accrued for which are not yet deductible, net capital losses and tax free deferred income. Net assets attributable to unitholders are classified and disclosed as a liability in the statement of financial position. Net capital gains on the realisation of any financial instruments (including any adjustments for tax deferred income previously taken directly to net assets attributable to unitholders) and accrued income not yet assessable will be included in the determination of distributable income in the same year in which it becomes assessable for tax. (i) Comparative Figures When required by Accounting Standards, comparative figures have been adjusted to conform to changes in presentation for the current financial period. (j) Trade and Other Receivables Receivables may include amounts for dividends, interest and securities sold where settlement has not occurred. Dividends are accrued when the right to receive payment is established. Interest is accrued at the reporting date from the time of the last payment. Amounts are generally received within 30 days of being recorded as receivables. 24

25 NOTES TO THE FINANCIAL STATEMENTS 1. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (k) Trade and Other Payables Trades are recorded on trade date and normally settled within 3 business days. Purchases of securities and investments that are unsettled at reporting date are included in payables. Payables include liabilities and accrued expenses owed by the Fund which are unpaid as at the reporting date. The distribution amount payable to unitholders as at the reporting date is recognised separately on the statement of financial position as unitholders are presently entitled to the distributable income at year end under the Fund s constitution. (l) Applications and Redemptions Applications received for units in the Fund are recorded net of any entry fees payable prior to the issue of units in the Fund. Redemptions from the Fund are made at the exit price and are recorded gross of any exit fees payable after the cancellation of units redeemed. Unit redemption prices are determined by reference to the net assets of the Fund and divided by the number of units on issue. (m) Expenses All expenses, including responsible entity s fees and custodian fees, are recognised in the statement of profit or loss and other comprehensive income on an accruals basis. (n) Critical Accounting Judgements and Key Sources of Estimation Uncertainty In the application of the Fund s accounting policies, which are described in Note 1, management is required to make judgements, estimates and assumptions about carrying values of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods. (o) Adoption of new and revised Accounting Standards. The Fund has adopted all new, revised or amending Accounting Standards issued by the Australian Accounting Standards Board (AASB) that are mandatory for reporting period ending on or prior to , as provided below. Any new, revised or amending Accounting Standards or Interpretations that are not yet mandatory have not been early adopted. 25

26 NOTES TO THE FINANCIAL STATEMENTS 1. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Any significant impact on the accounting policies of the Fund from the adoption of these Accounting Standards and Interpretations are disclosed below. The adoption of these Accounting Standards and Interpretations did not have any significant impact on the financial performance or position of the Fund. AASB 13 Fair Value Measurement and AASB Amendments to Australian Accounting Standards arising from AASB 13 The consolidated entity has applied AASB 13 and its consequential amendments from 1 July The standard provides a single robust measurement framework, with clear measurement objectives, for measuring fair value using the 'exit price' and provides guidance on measuring fair value when a market becomes less active. The standard requires increased disclosures where fair value is used. There are no other Standards that are not yet effective and that are expected to have an impact on the entity in the current or future reporting periods and on foreseeable future transactions. (p) Accounting Standards Not Previously Applied Australian Accounting Standards and Interpretations that have recently been issued or amended, but are not yet mandatory, have not been early adopted by the Fund for the annual reporting period ended As at the date of this report there are a number of new accounting standards and interpretations that have been issued and are applicable to the Fund but are not yet effective for reporting periods ending on or prior to , as provided below: AASB 9 Financial Instruments. (issued December 2009 and amended December 2010 and December 2013 and 2014) AASB 124- Related Party Disclosures Amends the requirements for classification and measurement of financial assets. The available-for-sale and held-to-maturity categories of financial assets in AASB 139 have been eliminated. Adoption of AASB 9 is only mandatory for the year ending There will be no impact on the financial statements when these amendments are first adopted because the Fund recognises Financial Assets as fair value through profit or loss. The amendment requires separate disclosure of amounts recognised as an expense for key management personnel services provided by a separate management entity. There will be no impact on the financial statements when these amendments are first adopted because this is a disclosure standard only. However, as the group currently engages the services of a management entity, additional disclosures will be required when this amendment is adopted for the first time for the year ended

27 NOTES TO THE FINANCIAL STATEMENTS 2. FINANCIAL RISK AND MANAGEMENT POLICIES The Fund's principal financial instruments comprise receivables, payables, cash and short-term deposits and financial assets held at fair value through profit or loss. These activities expose the Fund to a variety of financial risks: market risk (including currency risk, interest rate risk and price risk), credit risk and liquidity risk. Although the Fund does not have documented policies and procedures, the Directors manage the different types of risks to which it is exposed by considering risk and monitoring levels of exposure to interest rate risk and by being aware of market forecasts for interest rates. Liquidity risk is monitored through analysis of market liquidity. The Fund holds the following financial instruments: Financial Assets Cash and cash equivalents 456, ,873 Trade and other receivables 140,570 51,095 Financial assets at fair value through profit or loss 17,529,642 14,753,692 Total Financial Assets 18,126,625 15,120,660 Financial Liabilities Trade and other payables 206, ,900 Distributions payable 289, ,953 Total Financial Liabilities 496, ,853 Net exposure 17,630,267 14,736,807 Risk Exposures and Responses Interest rate risk Interest rate risk is the risk that the value of a financial instrument will fluctuate due to changes in market interest rates. 27

28 NOTES TO THE FINANCIAL STATEMENTS 2. FINANCIAL RISK AND MANAGEMENT POLICIES (CONTINUED) The Fund s exposure to market interest rates relates primarily to the Fund s holding of debt and debt like securities. The Fund manages its interest rate risk with reference to analysis of the expected change in interest rates due to economic and other factors. Sensitivity Analysis The following sensitivity analysis is based on the interest rate risk exposures in existence at year end: Net Profit Higher / (Lower) Year Ended 30 Net Assets Higher / (Lower) Year Ended % (100 basis points) (777,798) (709,539) (777,798) (709,539) % (50 basis points) 415, , , ,113 This risk is inherently linked to movements in market price. The impact of a change in the yield to expected maturity, as presented above, on post tax profit or net assets is not mutually exclusive to the change in price risk illustrated in the price risk disclosure note below. Credit risk Credit risk is the risk that a counterparty will fail to perform contractual obligations, either in whole or in part, under a contract. The maximum exposure to credit risk, excluding the value of any collateral or other security, at the reporting date to recognised financial assets is the carrying amount of those assets, net of any allowance for impairment, as disclosed in the statement of financial position and notes to the financial report. The Fund trades only with recognised, creditworthy third parties, and as such collateral is not requested nor is it the Fund's policy to secure its trade and other receivables. In addition, receivable balances are monitored on an ongoing basis with the result that the Fund s exposure to bad debts is not significant. There are no significant concentrations of credit risk. 28

29 NOTES TO THE FINANCIAL STATEMENTS 2. FINANCIAL RISK AND MANAGEMENT POLICIES (CONTINUED) Price risk Price risk is the risk that the value of the Fund s investment portfolio will fluctuate as a result of changes in market prices. The Fund has exposure to changes in security prices. The Fund s securities are generally listed on the ASX and are exposed to changes in prices due to changes in interest rates and other market risk factors. Prices are affected by changes in both the general level of interest rates and the extra margin applying to each security. The extra margin is influenced by market, company and security specific issues. The risk is managed by the responsible entity ensuring that all activities are transacted in accordance with mandates, overall investment strategy and within approved limits. The following sensitivity analysis is based on the price risk exposures in existence at year end. Net Profit Higher / (Lower) Year Ended 30 Net Assets Higher / (Lower) Year Ended Change in price +5% 876, , , ,684 Change in price -5% (876,482) (737,684) (876,482) (737,684) 29

30 NOTES TO THE FINANCIAL STATEMENTS 2. FINANCIAL RISK AND MANAGEMENT POLICIES (CONTINUED) Liquidity Risk Liquidity risk is the risk that the Fund will experience difficulty in either realising assets or otherwise raising sufficient funds to satisfy commitments associated with financial liabilities. The Fund manages liquidity risk by monitoring cash flow and maturity profiles of financial assets and liabilities. Maturities of financial liabilities The tables below analyse the Fund s financial liabilities into relevant maturity groupings based on the remaining period at the reporting date to the contractual maturity date. The grouping below is based on the expected maturities of the underlying assets. Unit holders are able to redeem units on a monthly basis and all assets are highly liquid. Carrying value of the financial liabilities approximate future cash outflow. Year ended < 6 months years > 5 years Total months Financial liabilities Trade and other payables 206, ,506 Distributions payable 289, ,852 Financial Liabilities 496, ,358 Year ended < 6 months years > 5 years Total months Financial liabilities Trade and other payables 158, ,900 Distributions payable 224, ,953 Financial Liabilities 383, ,853 30

31 NOTES TO THE FINANCIAL STATEMENTS 2. FINANCIAL RISK AND MANAGEMENT POLICIES (CONTINUED) Foreign Exchange risk The Fund has no direct exposure to foreign exchange risk. Net fair value of Financial Assets and Financial Liabilities The carrying amounts of financial assets and liabilities are shown in the statement of financial position at their appropriate fair value. The financial instruments recognised at fair value in the statement of financial position have been analysed and classified using a fair value hierarchy reflecting the significance of the inputs used in making the measurements. The fair value hierarchy consists of the following levels: quoted prices in active markets for identical assets or liabilities (Level 1); inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (as prices) or indirectly (derived from prices) (Level 2); and inputs for the asset or liability that are not based on observable market data (unobservable inputs) (Level 3). Year ended Level 1 Level 2 Level 3 Total Financial assets at fair value through 17,015, ,700-17,529,642 profit or loss Total 17,015, ,700-17,529,642 Year ended Level 1 Level 2 Level 3 Total Financial assets at fair value through 13,756, ,605-14,753,692 profit or loss Total 13,756, ,605-14,753,692 Included within Level 1 of the hierarchy are listed investments. The fair values of these financial assets have been based on the closing quoted bid prices at reporting date, excluding transaction costs. 31

32 NOTES TO THE FINANCIAL STATEMENTS 2. FINANCIAL RISK AND MANAGEMENT POLICIES (CONTINUED) In valuing the unlisted investment, included in Level 2 of the hierarchy, valuation techniques including valuation of the security by banks and brokers has been adopted to determine the fair value for this investment. Defaults and breaches There were no defaults or breaches of financial liabilities during the year. 32

33 3. REVENUE FROM ORDINARY ACTIVITIES (a) Revenue AUSTRALIAN ENHANCED INCOME FUND NOTES TO THE FINANCIAL STATEMENTS Dividends and distributions 411, ,550 Interest 370, ,630 Other income 2,500 - Total Revenue 784, ,180 (b) Net gain/(loss) on financial assets held at fair value through profit or loss Realised (loss)/gain on financial assets held at fair value through profit or loss (13,092) 115,733 Unrealised (loss)/gain on financial assets held at fair value through profit or loss (732,454) 696,355 Total (loss)/gain on financial assets held at fair value through profit or loss (745,546) 812, AUDITORS REMUNERATION Remuneration of the auditor of the Fund for: Auditing or reviewing the financial report by BDO 27,162 26,496 27,162 26,496 No non-audit services were provided to the Fund by BDO East Coast Partnership for the year ended (2014: Nil) 33

34 5. TRADE AND OTHER RECEIVABLES AUSTRALIAN ENHANCED INCOME FUND NOTES TO THE FINANCIAL STATEMENTS Other receivables 140,570 51, ,570 51,095 Trade debtors relate to outstanding settlements and income receivables, and are on the terms operating in the securities industry. Settlements are made within three days of the date of a transaction. Income receivable relates to accrued income and are non-interest bearing and unsecured. No trade or other receivables owed were past the due date and no allowances for impairment are required. 6. NET ASSETS ATTRIBUTABLE TO UNITHOLDERS Movements in the number of units and net assets attributable to unitholders during the period were as follows; As stipulated in the Fund Constitution, each unit represents a right to an individual share in the Fund and does not extend to a right to the underlying assets of the Fund. There are no separate classes of units and each unit has the same rights attaching to it as all other units of the Fund. Net assets attributable to unitholders 2015 No Opening balance 2,249,528 14,736,807 Applications 651,986 4,119,526 Redemptions (2,995) (19,687) Loss attributable to unitholders before income tax - (175,343) Distributions paid and payable - (1,031,036) Closing balance 2,898,519 17,630, No Opening balance 2,440,853 15,455,945 Applications 41, ,109 Redemptions (233,168) (1,497,025) Profit attributable to unitholders before income tax - 1,438,774 Distributions paid and payable - (933,966) Closing balance 2,249,528 14,736,807 AUSTRALIAN ENHANCED INCOME FUND 34